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California Professional Corporation San Diego

California Professional Corporation San Diego Summary

A California professional corporation is a corporation created pursuant to California Corporations Code §§ 100-2319 to practice a single profession in a corporate form. Professions are services that may be rendered pursuant to a license, certification, or registration authorized by California law. California Corporations Code §§ 13401(a), 13401.3.

Operating a California professional corporation formed by San Diego Corporate Law may have several, distinct advantages over sole proprietorship and other forms of business organization, including:

• Limiting personal liability against claims from lawsuits and creditors;

• Obtaining credit without making a personal guarantee;

• Reducing self-employment taxes for shareholders earning wages; and

• The availability of fringe benefits, such as medical care and retirement.

All California professional corporations formed by San Diego Corporate Law include attorney-drafted articles of incorporation, bylaws, federal EIN application, corporate records book, stock certificates, and minutes for the organizational meeting of the board of directors.

Forming a California Professional Corporation

Professional corporations are governed by the Moscone-Knox Professional Corporation Act. California Corporations Code §§ 13400–13410. The formation process for a California professional corporation is similar to the formation of as a California nonprofessional corporation and is generally subject to the same requirements. The laws generally applicable to nonprofessional California corporations apply to professional corporations except when such provisions conflict with or are inconsistent with the Moscone-Knox Professional Corporation Act. California Corporations Code § 13403.

Purpose

The purpose stated in the articles of incorporation of a California professional corporation must state the particular profession to be practiced by the corporation and that the corporation may practice only that profession. California Corporations Code § 13404. In addition to practicing a particular profession, a California professional corporation may also engage in another business if permitted to do so by the governing board of such profession. California Corporations Code §§ 13401(b), 13404.

Permissible Shareholders and Directors

Unless subject to an exception under the California Corporations Code, only an individual licensed to practice the profession of the professional corporation may be a shareholder; however, for certain professions, other licensed professionals may hold shares or be officers, directors, or professional employees as long as shares owned by these other licensed professionals do not total more than 49% of all shares in the corporation. California Corporations Code §§ 13401(b), (d), 13401.5. A complete list of licensed persons that may hold shares in any particular professional corporation may be found in California Corporations Code § 13401.5 as follows:

Other restrictions on who may be a shareholder are contained in the California Business and Professions Code and the California Corporations Code. Persons licensed under the California Business and Professions Code, the Chiropractic Act, or the Osteopathic Act may be employed to render professional services by a California professional corporation listed in California Corporations Code § 13401.5. There are also various restrictions on whether a licensed professional may be a shareholder of more than one California professional corporation and whether a shareholder of a California professional corporation may be another professional corporation or must be an individual.

A California professional corporation with only one shareholder need have only one director who also must be the sole shareholder, and the sole shareholder must also serve as president and treasurer of the California professional corporation; in general, other officers need not be licensed professionals. California Corporations Code § 13403. A California professional corporation with only two shareholders need have only two directors who also must be the two shareholders, and those two sole shareholders must also serve as president, vice-president, secretary, and treasurer of the California professional corporation. California Corporations Code § 13403.

Deciding to Form a California Professional Corporation

Non-Tax Considerations

The primary non-tax advantage to forming a California professional corporation is that the shareholders of a professional corporation are not personally liable for the corporation’s debts and other liabilities, except certain payroll taxes and malpractice liability arising from the professional shareholder’s own negligence. While a professional may not limit their own malpractice liability by practicing in corporate form, practicing as a California professional corporation allows a licensed professional to limit personal liability for the malpractice of their colleagues and for the commercial, general liability, and vendor obligations of their professional corporations. California Business and Professions Code § 6160; California Commercial Code § 2343(3).

The following professions must provide malpractice insurance within specified limits:

Accountants (16 California Code of Regulations § 75.8);

Attorneys (State Bar Law Corp. R 3.158);

Chiropractors (16 California Code of Regulations § 367.8(b));

Dentists (16 California Code of Regulations § 1059);

Optometrists (16 California Code of Regulations § 1547); and

Naturopaths (16 California Code of Regulations § 4266).

The following professions are not legally required to provide malpractice insurance:

Tax Considerations

A California professional corporation that does not make an S corporation election will more than likely be treated as a personal service corporation that will result in the California professional corporation being taxed at a flat 35 percent. Internal Revenue Code § 11(b)(2). Such a California professional corporation cannot deduct “unreasonable compensation” for income tax purposes. Klamath Med. Serv. Bureau v. Commissioner, 29 T.C. 339 (1957), aff’d 261 F.2d 842 (9th Cir. 1958), cert. denied, 359 U.S. 966 (1959); Eduardo Catalano, Inc., Pension Trust, et al. v. Commissioner, 38 T.C.M. 763 (1979). Therefore, distributions made to a shareholder that are determined to be unreasonable compensation will be taxed as a dividend, subjecting the distributions to tax at both the corporate and the shareholder level, unless the corporation elects S-corporation status.

A California professional corporation may elect to be taxed as a Subchapter “S” corporation. Electing to be taxed as a Subchapter “S” corporation prevents the California professional corporation from being treated as a personal service corporation. With regard to fringe benefits, Subchapter “S” corporations are treated as partnerships, with all shareholders holding more than 2 percent of the corporation’s stock being treated as partners of a partnership. Internal Revenue Code § 1372(a)(2). Subchapter “S” corporations are generally treated as “flow-through” entities for income tax purposes, but still pay a California tax on corporate income, albeit at a reduced rate. California Revenue and Taxation Code §§ 23151, 23501, 23802(b)(1). Like California nonprofessional corporations, California professional corporations must pay the Franchise Tax Board the $800 minimum tax regardless of whether the corporation has taxable income; the minimum tax is waived in the first year of incorporation. California Revenue and Taxation Code §§ 23153(d)(1), 23153(f)(1).

Pricing Assumptions

The organization of a California professional corporation for the pricing listed on this page assumes a single class of stock and the issuance to founders domiciled in California valued at US$25,000.00 or less. More complex organizations and share issuance available by quotation. Filings required by applicable federal and blue sky securities laws available for additional fees and with additional costs.